Latest Chinese data has retail sales up by 13.2 per cent in the year to August (consensus 13.2 per cent); industrial production up 8.9 per cent – the weakest rate in more than three years (consensus 9.2 per cent); and fixed asset investment over the first eight months of 2012 was up by 20.2 per cent (consensus 20.4 per cent).
- Inflation still well contained. China’s annual inflation rate rose from a 30-month low of 1.8 per cent to 2.0 per cent in August, in line with forecasts. Over the month inflation rose by 0.6 per cent after a 0.1 per cent lift in July. Food prices rose by 1.5 per cent in August while non-food prices rose just 0.1 per cent.
- Business inflation (producer prices) fell by 0.5 per cent in August after falling by 0.8 per cent in July. Producer prices are 3.5 per cent lower than a year ago – a 34-month low.
- Data supports stimulus moves. The latest data supports the decision by Chinese authorities to approve infrastructure projects valued at US$157 billion.
What does it all mean?
- Effectively the latest economic data is ancient history. Recognising the economy needs a kick along, Chinese authorities have approved new infrastructure projects, such as highways, ports and airport runways, valued at US$157 billion. While positive for Chinese businesses and commodity producers in Australia, it won’t assist with the longer-term goal of shifting economy-wide spending away from the industrial sector to consumers.
- Inflation is under control with the only factor boosting prices in the latest month outside authorities’ control – namely food. So Chinese policymakers can afford to cut interest rates or reduce reserve requirements in coming months if growth continues to stagnate.
- The Chinese policymakers are adopting a softly, softly approach to economic stimulus. During the global financial crisis in 2008, China launched a 4 trillion yuan (US$630 billion) stimulus package. While that had the desired effect of insulating the Chinese economy (and to some extent Australia) from the crisis, the concern is that it may have been too much – leading to some over-heating of the property sector.
What do the figures show?
- The annual rate of consumer price inflation rose from 1.8 per cent to 2.0 in August, in line with expectations. Over the month inflation rose by 0.6 per cent, up from forecasts centred on a 0.5 per cent increase and up from a 0.1 per cent gain in July.
- Food prices rose by 3.4 per cent over the year to August (2.4 per cent in July) while non-food prices rose by just 1.4 per cent in the year to August (1.5 per cent in July).
- Producer prices (business inflation) fell by 0.5 per cent in August after falling by 0.8 per cent in July. Producer prices are 3.5 per cent lower than a year ago – a 34-month low. The annual rate of producer price inflation peaked in July 2011 at 7.5 per cent and has been declining since.
- Industrial output expanded at an 8.9 per cent annual pace in August, down from 9.2 per cent in July and below forecasts centred on a result near 9.1 per cent. Production is growing at the weakest pace in more than three years (May 2009) and well off the highs of 20.7 per cent annual growth in January/February 2010.
- China’s urban fixed asset investment, such as spending on roads and power plants, grew at a 20.2 per cent in 2012 to date (January – August), below forecasts (20.4 per cent) and down from 20.4 per cent in the seven months to July.
- Retail sales grew at a 13.2 per cent annual rate in August, up from 13.1 per cent in the year to July and in line with forecasts.
What is the importance of the economic data?
- China’s National Bureau of Statistics releases its monthly economic statistics around the 10th of each month. Quarterly GDP data is released around the 16th of January, April, July and October. China is Australia’s largest trading partner and changes in the Chinese economic have major implications for the Aussie economy.
What are the implications for interest rates and investors?
- Chinese policymakers are doing what they have to, to support their flagging economy. China can’t rely on a fast revival of European, Japanese or US economies, so effectively it has to provide the boost that the world needs.
- The slowdown of the Chinese economy doesn’t appear to be gathering pace, but there are only tentative signs of growth bottoming out. The new infrastructure program will go some way in ensuring that the economic slowdown is arrested and clearly it is positive for Australian mining and energy firms. The only negative is that the boost to the Chinese economy has boosted the Aussie dollar, making it more difficult for Aussie companies.
- The new infrastructure program should ensure that the Australian Reserve Bank stays on the sidelines for a longer period.